Is ad income on your publication taxable?

October 23, 2016

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Tax-exempt organizations that produce publications
for their members should remember to look carefully at the tax law if they receive income from advertising in those publications. They may be liable to pay taxes on advertising income if their members have the “right to receive” the publications.

A Tax
Court decision last year found that if a tax-exempt organization’s members “have a right to receive a publication” then income from paid advertising is taxable, even if the advertising does not exceed the cost of producing the publication.

A tax-exempt organization, the National Education
Association of the United States, published two magazines that
were distributed to dues-paying members and a small number
of nonmember paid subscribers

The organization’s literature stated that a portion of the
dues was paid for production of the magazines. The association
sold advertising space to defray the expenses of
producing and mailing the magazines.

The National Education Association experienced unrelated business taxable
income from the advertising but offset the income with a loss
from its circulation activities.

Treasury regulations require that a portion of the membership
dues be treated as circulation income when the
“right to receive” an organization’s periodicals is associated
with membership in the organization and members do not pay for the subscriptions. If members do not have the right to receive the publications, then the net advertising income may not be taxable.

The Tax Court found that, because the organization’s
members had a legal right to receive the magazines and didn’t pay for the subscriptions, a portion
of the membership dues was circulation income as a result of
this income allocation. Therefore, there was no loss from the circulation
activity, and the organization owed unrelated business income
tax on the advertising income. (National Education Association
of the United States v. Commissioner, 137 TC No. 8, Sept. 28,
2011)